Historical Norms Don't Apply

As new statistics confirm the extent of the real estate
market collapse, many wishful thinkers now herald bad data as positive
omens. For example today's release of dismal October housing start figures
convinced many naive economists that the market was on the mend. They
argued that the 14% decline in housing starts from September (the lowest
activity in six years) and the lowest number of building permits
for the last nine years would solve the problem of oversupply, thereby
restoring balance to the market. Talk about lemonade from lemons.

The current glut of homes comes when home ownerships rates are at the
highest levels in history while home affordability is at its lowest. The recent
reduction in new and future construction is too little and comes too late to
restore balance. The optimistic reaction is based on comparisons to historical
averages of prior real estate down-turns. However, a comparison
of the real estate mania of 1996-2005 to any prior national real estate
boom reveals the folly of applying historical norms to the current correction.
Economists, market strategists, and homeowners who still harbor a dream of
a real estate soft-landing, with marginal price declines and minimal spill
over into the broader economy, are in for one of the ruddiest awakenings of
all time.

A variety of factors have combined to create market conditions that simply
did not exist in the past. The widespread elimination of lending standards,
down-payments, documented loans, and full amortization, combined with
rampant proliferation of speculation, leverage, over-building, "creative" financing,
re-financing, equity extractions, teaser rates, phony appraisals, ARMs, negative
amortization loans, second and third home purchases, and out-right mortgage
fraud, have created home prices that are completely untethered from reality.

Furthermore, more so than during any other period of American history,
consumer spending is now largely dependent home equity extractions and temporarily
low mortgage payments. As a result, predictions as to how the real
estate slowdown will impact the economy should be made by comparisons
to the deflation of prior asset bubbles. However, fallout from the
bursting of this bubble may be more damaging than virtually any financial
correction that we have experienced since the Great Depression.

Mr. Schiff is one of the few non-biased investment advisors
(not committed solely to the short side of the market) to have correctly called
the current bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S. stock market,
commodities, gold and the dollar, he is becoming increasingly more renowned.
He has been quoted in many of the nations leading newspapers, including The
Wall Street Journal, Barron's, Investor's Business Daily, The Financial Times,
The New York Times, The Los Angeles Times, The Washington Post, The Chicago
Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle,
The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer,
and the Christian Science Monitor, and has appeared on CNBC, CNNfn., and
Bloomberg. In addition, his views are frequently quoted locally in the Orange
County Register.

Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in finance and
accounting from U.C. Berkley in 1987. A financial professional for seventeen
years he joined Euro Pacific in 1996 and has served as its President since
January 2000. An expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial newsletters
and advisory services.